The Beauty of Factoring

In our last video we reviewed cash management – specifically the amount of equity – that means your hard cash investment – needed to offset expenses you will endure while waiting to be paid by your customers.

If you are fortunate enough to have customers that pay within 30 days and you can invoice on a weekly basis the minimum ratio of cash needed to weekly invoice is about 5 to 1.  If your customers take longer or if you can only bill monthly – the ratio goes up substantially.  And – and this is very important – this ratio does not leave you any capital to grow.

In the last video we touched upon the benefits of factoring.  My company us invoice funding factors invoices for our clients – we believe factoring is the best cash infusion program for small business.  And i can attest – i have used it as a client.

So last time we created a company that invoices $100,000 weekly.  It must satisfy a $40,000 weekly payroll, $25,000 weekly  vendor costs that it accumulates and pays monthly, and $22,000 weekly G&A that it pays every two weeks.  

 It is a 6 month forecast of the company’s cash flow demands  columns 1 through 5 demonstrate the amount of equity needed to be contributed by ownership to keep the company cash positive.  Columns 6 through 8 demonstrate the positive cash relief advanced through factoring.

Let me explain weeks 1 through 4 because they repeat themselves throughout the six months.

Week one – the company must make payroll - $40,000, it produces a customer invoice of $100,000 that will be paid in 30 days.

Week two – the company must make payroll  - $40,000 and two weeks of G&A of $44,000 - $84,000 total this week, it produces another invoice of $100,000 to be paid in 30 days – please not column 5 – the company is now out $124,000

Week three – the company must make payroll - $40,000 and it produces another invoice.

Week four – payroll - $40,000, G&A - $44,000 and now material and vendor statements  of $108,000 – why $108k and not $100k because there are more than 4 weeks in a month.  At this point the company is now out $356,000 without payment.

Payments start coming in on the 5th week.  As payments come in and expenses arise going forward the cash requirements are tabulated in column 5.  As you  can see, going down the column – it takes a lot of money to make a profit.

Now let’s talk about columns 6, 7, & 8 – us invoice funding to the rescue.  And I want to go back to weeks 1 through 4.  For every $100,000 invoice, USIF is going to advance $85,000 to the company.  Now compare column 7 with column 5.  In the 5th week after receiving it s first customer payment, this company still requires a $300,000 investment and USIF has done just that and nearly $40,000 more.

At the end of 24 weeks, instead of being out $138,000 the owners are up $162,000 thanks to USIF advances.

Throughout our videos i have talked about creating an independet stand alone entity – positive cash flow management, without the need for owners’ contributions, is a vital requirement – factoring can eliminate this concern

Check out our next set of videos – we are going to discuss, payment terms – the cost of money – and smart financing.

View the corresponding video on YouTube!